Russia and the economic crisis: this rouble crisis was definitely different from the one in 1998, but the political situation remains worrisome anyway… Pt II

Yesterday, I wrote the first part of this article about our family trip to Russia in the midst of the Ruble crisis.

Today, I will continue the second part with some first hand stories of the uncurable corruption and bureaucratic failures in Russia, which makes real economic change and progression so very hard. Afterwards, I will print the pertinent snips from a must-read economic outlook for 2015, written by Sergei Serebrov in the Russian online newspaper Utro.

Dima, a friend of ours, is a medical doctor who has worked as an administrative clerk at a central purchase department for hospitals in St-Petersburg. He told us a tell-tale anecdote about the purchase of X-ray machines for a number of these hospitals.

“Some time ago, the central purchase department needed to purchase new, very expensive X-Ray machines for the hospitals in St-Petersburg.

You must know; when in Russia an official purchase happens, it almost always takes place according to the following scheme: the official price is for instance ₽100 million, but a discount of ₽20 million is negotiated between the persons representing buyer and seller. The buyer officially pays the ₽100 million, while the seller officially accepts the ₽80 million that they negotiated. Hence, the buyer and the seller divide the ₽20 million profit among eachother and each party walks away with ₽10 million in profits for his own piggy bank.

Unfortunately, however, in this case the people of the purchase department purchased the wrong machines, with the wrong specifications and measures. These machines were unusable for the hospitals in question.

So what happens? These machines are now stored somewhere outdoors, where wind, ice and rain can cause havoc upon the sensitive electronics. As a consequence, their value has probably dropped to virtually nought. The hospitals still need their X-ray machines, but somebody is counting his money coming from the first purchase. And now the same scheme will happen all over again. Welcome to Russia.”

This whole scheme of corruption was confirmed through another story, coming from another friend of ours, who works in a museum.

“My museum has a few fountains in the garden, which use water coming from the water supply in the museum itself. 

The waterpipe network and the manually operated installation for these fountains were subject to some serious maintenance, so the museum called company one for this job.

The representative of company one drew a tormented face when the current state of the waterpipes was discussed and told the museum that the whole watersupply needed to be renewed with new waterpipes and a new, electronic start-stop system for the fountains. 

As the waterpipes needed to be installed in the floor, together with the installation of the electronic regulators, this was a costly operation of ₽xx million. The museum got the budget from the city and company one got the refurbishing job. 

After a few weeks of installation activities, company one told the museum management that one very important part of the installation was missing. This new part would cost the museum another ₽xx million. Of course the fountains were not working, but company one was told to hit the road anyway.

Now company two comes into the equasion. The representative of company two drew also a tormented face and told the museum management that the installation of the pipes in the floor, as well as the already installed electronic equipment, were totally useless for the job.

Hence, a totally new installation was needed, which would cost the museum another ₽xx million. Again the museum got the budget and company two got the job. This company also messed up somewhere in the process, so now the museum had two non-working water installations and still the old water supply for the fountains.

Enter company three and the story goes on and on…

The most shocking thing was that both company one and company two had close ties to members of the museum management, when they were hired. I was so angry that I complained at the museum management and at all kinds of other public officials, but nobody cared to listen, because everybody is involved in such corruption schemes.

They don’t fire me, because I am one of only two persons that know this museum by heart and I am the only one capable of running the place. Nevertheless, nobody wants to hear my story. When there is a simple crack in the museum wall, which can be repaired for only ₽5000, they order a complete wall replacement, because this yields national funding money to friends and family of the museum management”.

It is this kind of corruption that makes so many Russians sick to the bone. It is not the Italian mob-style of corruption where people get threatened or murdered, but a kind of ‘petty’ embezzlement of money. Almost nobody wants to know the truth, because it is just too lucrative: everybody is in for a slice of the pie, except for a few fools who are too honest for such schemes. Changing this behaviour is virtually impossible…

The Russian online newspaper Utro had a revealing interview with economist Sergei Serebrov about 2015. In his words, 2015 will be ‘a year of disaster’. Here are the pertinent snips of this revealing interview, translated by Google Translate and turned into English by me.

The current political and economic model is only able to operate in conditions in which there is a constant flow of resources from outside.

The current economic crisis in Russia, resulting from a combination of both objective and purely subjective reasons, does not give grounds to hope that the current status quo, which existed since Vladimir Putin came to power, can be preserved.

The reason for that lies in the rapid depletion of the resource base that funded the existing economic system. The current form of capitalism, which can be called ‘crony capitalism’, could merely exist due to the constant and growing influx of export-based funds and foreign loans. 

Now that this influx has diminished, it is the question whether the economic system will survive. This will require new resources; probably coming from small and medium businesses and from the Russian population. How this will happen, is told in the following old joke: when a man is fired from his job, his son asks: “Dad, will you now drink less Vodka?”. Reply: “No, son… YOU will eat less”. The role of the son in this joke is for the entire Russian population.

However, in terms of impact, these "sources" of funding money are no match for the funds coming from the oil and gas exports. It will be virtually impossible to keep up the full bureaucratic apparatus that emerged during recent years. This means that the population will have to pay much more taxes, fees and levies.

However, a fundamental redrawing of the power pyramid, under the influence of changing circumstances, is unlikely during the coming year. In the worsening economic crisis, this will be a serious test for the head of the state and his image in the eyes of the population.

In 2015, Putin will get in a contradictory situation. To preserve the stability of his power he must improve, or at least not worsen the relations with the West. On the other hand, however, he must maintain the image of the west as an external enemy for domestic purposes, in order to let his political campaign be successfull.

Annexation of Crimea not only turned out to be a powerful action to improve the president's popularity among Russians, but it also offsetted unwanted claims to the entire political system and its main actors. At the same time it was clearly ‘one bridge too far’ for the rest of the world. At some point, the European change in opinion about Russia has become so disturbing, and sometimes even dangerous for the Kremlin that it abruptly slowed down its geopolitical activity.

It is likely that all of this will be continued in 2015. Putin will be forced to convince the West of the need to "hush up" with respect to the Crimean issue. This is perhaps the only topic on which the Russian president will not make any concessions, because otherwise he risks losing the support of a large part of the country.

Instead, it is possible that the West will be offered compensation in the form of a settlement with respect to the "Ukrainian issue" at terms more favorable to Kiev, Brussels and Washington. Very presumably, the Novorossiya project will be closed. For some time, it will be used as a PR tool in the country itself, but in its foreign policy Moscow will try to distance itself from this project completely.

This whole article is an absolute must-read in my opinion, as it sheds an interesting light on the Russian motivations that have been in play the current Russian/Ukrainian conundrum. It also sketches the bleak economic future that lies ahead of both Russia and the Putin regime, for this and perhaps the next few years. Even if the oil price rebounds, it seems that the years of above average growth and conspicuous consumption are over in Russia.

What will come instead, will remain the question for the coming years. One thing is certain; if Russia wants to have a healthy economy, with a financially healthy middle class and sound small and medium enterprises, it needs to fight the ubiquitous corruption that poisons the whole economy: top down and bottom up. These witness stories are a tell-tale testimony for that.